Mr. KUн. I may be; I may be.

The CHAIRMAN. You are permitted to be without limit, to be in the market and buying and selling for yourself.

Now, what is to keep you from going and buying 10,000 bushels of wheat, since you have that order for a million bushels, and know that that will put the price up a little or that that is the tendency? You go in and buy 10,000 bushels. You are in the market without limitation. You can trade on your own account.

Mr. KUн. It is against the rules. It is doing what is called running ahead of the order, which is the case we are discussing. There are two things that would keep me from doing that. One might not. If I were dishonest I might try to do it. In the first place, ordinary honesty would keep me from doing it, and, in the second place, fear of getting caught, if I were dishonest, would keep me from doing it, because it is a violation of the rule of the exchange and I can be suspended from the exchange for doing it.

The CHAIRMAN. Now, if you had an order to buy a million bushels of wheat, and you had an order to sell a million bushels, you could buy 10,000 bushels. When I say " you ", I am just using "you" as an illustration. I am not speaking personally.

Mr. KUн. I understand.

The CHAIRMAN. You could buy the 10,000 bushels and then put in your million-bushel order and then sell 20,000. Sell that 10,000 and another in executing your order for a million bushels, run the market down and get an advantage in both cases. I mean, if you were disposed to take advantage of it.

Mr. KUн. If I am disposed to be a crook, I probably would try to make money dishonestly, and I do not think I would last very long on the board of trade. Crooks are very soon found out.

The CHAIRMAN. I think that is very true about you, but the very discussion of this shows that it is one of the most highly technical of occupations, does it not?

Mr. KUH. Yes, sir; and our honor happens to be very high. We are fortunate in that. I mean this. This is not propaganda.

The CHAIRMAN. There is no profession you could conceive of which requires a higher order of good faith.

Mr. KUн. Well, it requires an extreme order of good faith.
The CHAIRMAN. Just as high as there is, just the highest.
Mr. KUн. Yes, sir.

The CHAIRMAN. That being true, does it not look logical that if there is any profession that ought to be licensed, this is the one?

Mr. KUн. That might be true if the license does not put us in the position where our business could be ruined overnight, and if we had no other means of being kept in order and kept true to our position of trust.

We maintain that we have very ample machinery for making us, in case we are not disposed to, live up to our trust. The gentleman who will speak next, I believe, is going to take that up more specifically.

The CHAIRMAN. You people trade on a commission basis, or are you paid salaries?

Mr. KUн. We are all on a commission basis.

The CHAIRMAN. Has there ever been a suggestion that you be paid on the basis of a salary and not permitted to trade at all for yourselves?

Mr. KUн. Yes. We were, I believe, until 1919, on salaries, with very, very few exceptions. It was a privilege for a man to be able to accept orders for a fee. Now, there is a rule against salaries. But in 1919 it became the rule of the exchange that all brokers must be paid a fee instead of a salary.

The CHAIRMAN. You are required to have someone on the exchange floor, or do you represent a commission house?

Mr. KUн. I must have a seat on the exchange.

The CHAIRMAN. Then, you may represent a commission house that does not have a seat on the exchange, may you not?

Mr. KUн. Well, now, I would have to give up the name of a clearing member, a member of a clearing house on the exchange, when I make a trade. If I make a trade with you, Mr. Jones, as another broker in the pit, I might say put the trade down in the name of Lampson Brothers, or any firm that I might get the order from. I would have to give the name of a clearing member there. I would have to represent a member of the exchange.

The CHAIRMAN. And that is the only capacity you are permittedin which you are permitted to act?

Mr. KUн. Yes, sir.

The CHAIRMAN. You are not permitted to act for someone who is not a member, take orders, for instance, from someone in Kansas City, to execute for some individual?

Mr. KUн. I may take an order from Kansas City, or any individual in this room, but he must tell me to clear that trade through a member, a clearing member of the board of trade in Chicago.

The CHAIRMAN. In other words, you do not hold that type of membership?

Mr. Kuй. There is only one type of membership and that entitles the members, all members, to the privileges of the exchange. The CHAIRMAN. You are not a member?

Mr. Kuн. I am a member. I am not a member of the clearing house.

The CHAIRMAN. And that is the way the orders must come, through the clearing house?

Mr. KUH. No; they do not come through the clearing house, but the transaction is cleared through the clearing house.

Mr. TOBEY. You have to give the name of the clearing house in connection with the sale; that is right?

Mr. KUн. Exactly.

The CHAIRMAN. You are required to clear the order through the clearing house in each instance where an order is executed? Mr. KUH. Yes, sir.

Mr. TOBEY. There is one question that I wish to ask, but first I want to concur in what you have said, insofar as your faith in the integrity of the majority of members is concerned, and I share it, too. The fact is that a great majority of men in the financial business of the country are honest, possessing as high a degree of honesty as is shown in any profession in the world; but I also realize that just the reverse is true also among a minority element in every

business in the world, every profession. This is preliminary to what I wanted to ask you.

Suppose, you Mr. Kuh, as a floor broker, received an order to sell 500,000 bushels of wheat at the market. You could then, under your practice and in accordance with your rules, take it up yourself? Mr. KUн. I could do what?

Mr. TOBEY. Take it yourself.

Mr. KUн. For my own account?

Mr. TOBEY. Yes.

Mr. KUн. No, sir; that is a strict violation. That is bucket shopping. That is the worst sin in our field.

Mr. TOBEY. But you could do this. You could go into the market yourself. Suppose that you had an order from Tom Jones on the other side of the river to buy 500,000 bushels and at the same time received an order to sell an equal amount, you could do that by washing sales?

Mr. KUн. That is a violation of the regulations.

Mr. TOBEY. Crossing sales?

Mr. KUн. Yes, sir.

Mr. TOBEY. All orders must be filled in the open market?
Mr. KUн. Yes.

Mr. TOBEY. They must be announced, given publicity, so that any other broker may bid on them or bid for them?

Mr. KUн. Yes. All trades must be made in the open market. Mr. TOBEY. If you had an order to buy and to sell, you could not cross them off of your books at the last market price?

Mr. KUн. No, sir; that is a violation of the rules. I have that rule here and can read it to you if you would like me to.

Mr. TOBEY. If you will.

Mr. KUH. Rule 202-A. "Orders must be executed in the public market" is the name of the rule. [Reading:]

66

All orders received by any member of this association, firm, or corporation, doing business on charge, to buy or sell for future delivery any of the commodities dealt in upon the floor of the exchange (except when in exchange for cash property" must be executed in the open market in the exchange hall during the hours of regular trading and under no circumstances shall any member, firm, or corporation assume to have executed any of such orders or any portion thereof by acting as agent for both buyer and seller either directly or indirectly, in their own name or that of an employee, broker, or other member of the association: Provided, That on transactions where brokers as agents for other members meet in the execution of orders in the open market and without prearrangement unintentionally consummate a contract for the one and same clearing member principal, such transactions shall not be considered in violation of this rule.

The meaning of the last part of that rule is that if a big commission house needs more than one broker in each pit, and supposing that I am one of five brokers, and I should get an order to sell 10,000 bushels of wheat at the market, and the market we will say is 95 bid, and I offer 10,000 bushels, and another broker says that he will take it-one who has an order-there is nothing to prevent me from selling that wheat, if he is the first one to take the offer, according to our customs. We have to sell it to the first person who accepts our offer, no matter whether he happens to be a broker for the same house or not.

Mr. TOBEY. That being so, why should you object at all to this provision of the bill. It only strengthens that provision in your rules and regulations.

Mr. Kuн. Well, I object to it as a license.

Mr. TOBEY. The next feature. Have you any recollection whatever of the exchange having disciplined or expelled members for running ahead, say, taking a 10,000 bushel order, buying it for themselves and then executing another order for the customer after that? Have there been instances where the exchanges have expelled members for that?

Mr. Kuн. Well, I am sure that members have been disciplined for that.

Mr. TOBEY. Do you know of any?

Mr. KUн. I do not.

Mr. TOBEY. And yet your predecessor testified that it had been done.

Mr. KUн. I cannot testify to that, with any assurance, because I do not know. Members are suspended on rare occasions and are expelled for violations of the rules, and I do not doubt that they have been for this, but I do not remember for what offenses. Members have been disciplined on rare occasions when they have violated the rules. We have little trouble on the exchange with dishonesty. I want to impress that upon you gentlemen.

That is all.

Mr. COOLEY. May I ask a question, Mr. Chairman?

The CHAIRMAN. Mr. Cooley.

Mr. COOLEY. What procedure do you follow in expelling a man from the exchange for violation of the rules of the exchange?

Mr. KUн. A committee is appointed. Well, in the first place, the charges are usually brought by some member to the business conduct committee. The business conduct committee looks into the charges, and if they think there is any basis for them whatever they appoint a committee to investigate these charges and then this committee appoints a prosecutor to prosecute the accused and he is tried before the board of directors. He is defended by another member of the board of trade and he is prosecuted by another member of the board of trade.

Mr. COOLEY. Does he have any appeal from their decision?
Mr. KUн. No, sir.

Mr. COOLEY. Now, one other thing: You made the statement that you did not want to be expelled from the exchange for or on account of the commission of an error.

Does not this bill contain the word "willful" and does that not give some protection against any error that might be committed?

Mr. KUн. Well, I thought about that, and what I think is this, that, unfortunately, this bill would, under a condition of that nature, and if a regulation were passed prohibiting brokers from trading for their own account, put a premium on dishonesty and it would create it, because if it were to my interest to do so and I was dishonest I could say that I was not trading for my own account, that that was

an error.

114603-35-SER B- -3

Mr. COOLEY. I know; your reputation would be brought into play, and you would call upon that to assist you, under those circumstances, would you not?

Mr. KUн. Well, it might be in a personal case, but I was thinking of it generally.

I hate to see an inducement to dishonesty brought into play.

Mr. COOLEY. Do you not have the same right when you are brought up before the exchange commission that hears any accusations, and are you not given the same right to explain that the violation of the rules was an error and it was honestly committed?

Mr. KUн. No; there is a prohibition of the exchange upon a member trading for his own account. I might be dishonest and be tried and defend myself by lying and saying I had not done it, that is true, but I would not get very far because they would not try me unless they have pretty good evidence. There is a vast majority of convictions in the few cases which are brought up for violations.

Mr. COOLEY. What I am trying to get at is this, does not this act give you the same safeguards and even better safeguards than you have under those exchange regulations?

Mr. KUн. No, sir; we are not tried by experts and the rules are not made by experts, or people who understand the technical machinery of the exchange.

Mr. MARSHALL. Mr. Chairman

The CHAIRMAN. Mr. Marshall.

Mr. MARSHALL. The question I had in mind is in connection with what has already been asked you, if the broker did make a sale ahead of an order he received, received an order to buy or sell 100,000 bushels and went ahead and transacted a 10,000-bushel order for your own account. Now, he is protected. In other words, at the end or the close of the day all sales are cleared, as I understand you, and this particular 10,000-bushel transaction would be cleared.

Mr. KUн. That would be very easily detected. Maybe not the first time, or possibly not the second time. I would say it would not take very many actions of that kind on the part of the broker, but that somebody would say to the commission house whose broker I was when I did that: You know, your broker in the pit there is making himself some change by buying a little wheat ahead of all of his big buying orders. If my client did not fire me it would probably get to the business conduct committee.

Mr. MARSHALL. In other words, when transactions are cleared they are cleared under your own name, showing that you did it? Mr. KUH. It would be on my trading card; yes.

Mr. MARSHALL. And that is easily distinguished?

Mr. KUH. It would not be cleared in my name, unless-that is technical, and I am not trying to dodge your question. They would know it, because it would be on my trading card; yes, sir.

Mr. MARSHALL. I was just wondering how easily it would be detected if anyone cared to observe it.

Mr. KUн. You have no idea how quickly it gets around, if anybody is shady in his activities.

The CHAIRMAN. Are there any further questions which anyone desires to ask? Thank you, Mr. Kuh.

Mr. Kuн. Thank you, Mr. Chairman.